Venture Deals

The most important terms to know about are the ones detailing the economics and control of the deal.

Make sure that your investors vote as a single class, and make sure that small investors can’t veto big decisions.

The board of directors is the most powerful element of a company’s management structure and almost always has the power to fire the CEO.

When someone leaves the company without their stocks, then we have reverse dilution where everyone is getting a bit of those stock.

Founders often receive one year of their stock right away, then the rest after the next three years.

In a pay-to-play provision, investors must keep investing pro-ratably in future financings (paying) in order to not have their preferred stock converted to common stock (playing) in the company.

The liquidation preference is important when the company is sold for less than what has been invested, but also important when it is sold for more.

When a new investor comes in, he’ll ask for a very low valuation. At the next round, he will ask for a very high valuation (to avoid dilution).

Warrants may happen in bridge loan situations. A bridge loan occurs when an investor is planning to do financing but is waiting for additional investors to participate. Accept warrants only as long as they are structured properly.

Avoid warrants, as they complicate the whole thing.

The reason why VCs want large option pools is to decrease as much as possible their own dilution.

Usually, employee option pools are anywhere between 10%-20% in early-stage companies.

When founders receive stocks, it’s called common stock. When investors buy stocks, it is called preferred stock. Preferred stock can become common stock, but not the other way around.

Every employee of a startup, including founders and each of the company’s executives, must sign a Proprietary Inventions and Assignment Agreement to protect the startup’s rights to its intellectual property.

So it is very important that the founder gets a signed agreement from his employer that states clearly that what the founder makes belongs to the founder. If not, the founder should leave his job asap.

A founding team should ensure that anyone who has had contact with their company’s intellectual property has signed agreements with confidentiality and IP assignment provisions.

You should also make available on the data site: 1. The cap table: spreadsheet with who owns what.Financial records, budgetsMajor customer listsEmployment agreements

You choose a lawyer based on their experience level, cost, and comfort with the communication style. Try to choose someone you like as they will know every detail about your business.

The Banker Rarely there for early stages. Bankers are useful for deals that include a partial recapitalization by a financial sponsor, such as a private-equity firm, or for acquisitions.

Accountant Rarely seen at this stage. Work with one used to work with startups.

Make sure the lawyer caps his fees.

Don’t let VCs decide your lawyer.

A great lawyer will help you focus on what really matters (economics and control), while a bad lawyer will make everything worse for you. So choose an experienced lawyer.

When it comes to raising, do, or do not. There is no try.

Reputation is of the utmost importance when raising.